2003 a bleak year for raising tech funds

But VCs optimistic capital supply available now for good companies

Glenn Drexhage

Technology firms craving capital in B.C. and across the country are likely bidding good riddance to 2003, given grim figures that highlight the worst financing conditions in years.

Money deployed by venture investors in Canada plummeted to $1.5 billion last year, compared to $2.5 billion in 2002, according to the recent annual report from the Canadian Venture Capital Association and research firm Macdonald & Associates Ltd.

However, the national number of companies that received funding remained similar - 616 in 2003 compared to 681 in 2002 - reflecting smaller deal sizes.

The figures are particularly gloomy for B.C., as the province's share of total disbursements fell to just seven per cent ($108 million) from 12 per cent ($302 million) in 2002.

By comparison, B.C. companies attracted $147 million in venture capital in 1998.

Nationally, biotech stood out as the strongest sector and attracted more venture dollars in 2003 ($317 million) than the previous year ($283 million).

All other tech sectors, from communications to Internet-related areas, attracted less money.

Local investors aren't cowed, however. Robin Louis, president of both the CVCA and Ventures West Management Inc., said the results were expected, noting that figures had receded from unsustainably high levels in 1999 and 2000.

"Maybe it's overshot a bit, but it goes up and down; and it happens to be down at the moment," he said.

There were local rays of hope. Ventures West, for example, announced a $158-million fund in November. That same month, Vancouver's NeuroMed Technologies Inc. raised a third round worth US$32 million, marking the biggest Canadian venture deal in 2003.

And earlier in the year, Yaletown Venture Partners announced its inaugural fund - now worth $32 million - to focus on early-stage investments in B.C. and Alberta.

Yaletown recently closed its first deal, investing in a Victoria tech firm (further details had not been announced at press time).

Steven Hnatiuk, a founding partner at Yaletown, maintains an upbeat outlook. "There appears to be a good solid source of venture capital supply now available to good quality companies here," he said.

Hnatiuk acknowledged that local tech companies could benefit from having more capital available yet also underlined other factors.

"I think that it is a bit of a red herring to focus only on capital managed in the region, because a fairly significant amount of the capital that is being invested into B.C. companies does come from outside," he said.

While lack of venture capital is a common theme, Louis also noted that part of the problem in 2003 was a dearth of solid investing prospects. Ventures West made only two new investments during the year, both in local firms: biotech OncoGenex Technologies Inc. and content management firm Maestro CMS Corp. "There weren't as many [opportunities] as we would have liked to have invested in," Louis said.

But Hnatiuk, whose company has reviewed between 300 and 350 business plans since it was launched, maintains that strong local prospects remain.

"I think there are lots of good quality deals here in B.C.," he said.

Indeed, Maestro CMS was one B.C. firm last year whose story was strong enough to attract a first round.

Thierry LeVasseur, the firm's founder and CEO, recalls that Maestro took about four months to prepare and then began its venture search at the beginning of August. "By September 15, we had enough term sheets to make a decision," he said. "It was easier than I expected."

LeVasseur attributed his success to simple yet elusive advice.

"Our message was extremely clear," he said, noting that his firm was profitable and had customers, and was seeking funding to expand sales.

He also said honesty is the best policy. For example, at the time Maestro didn't know the size of its particular market.

"We didn't try to hide any of those things; we just stuck to the facts," he said.